The crisis of the US dollar
As the end of 2024 approaches, there are increasingly loud signals about the coming “crisis of the US dollar”. The dollar’s weakening was further fueled by the U.S. Federal Reserve’s decision to cut interest rates by 50 basis points for the first time in years. Further reductions are expected to follow by the end of the year. The move lowered the yield on U.S. Treasury bonds, making dollar-denominated U.S. assets less attractive to foreign investors. But the problems are not limited to monetary policy. Rising inflation, rising government debt and global geopolitical upheavals are putting additional strain on the dollar. The expansion of the BRICS alliance (Brazil, Russia, India, China and South Africa) and increasingly loud calls for “de-dollarization” signal a change in the global financial order. As more and more central banks increase their reserves in euros, yuan or gold, the future of the dollar as the world’s dominant reserve currency is becoming increasingly uncertain.
Source: cointelegraph
How Would a Dollar Collapse Affect the Crypto Market?
The decline in the value of the US dollar often encourages investors to look for alternatives to preserve their assets. While in the past, investors turned to gold, real estate, or foreign currencies, today Bitcoin and other cryptocurrencies are an increasingly popular option. We saw an example of this trend during the COVID-19 pandemic in 2020, when massive government stimulus measures and interest rate cuts sparked fears of dollar inflation. During this period, the price of Bitcoin jumped from around $5,000 in March 2020 to over $60,000 in April 2021. If a serious dollar crisis were to occur, the consequences could be even more drastic. Disruptions in traditional banking systems could spur a wider use of decentralized finance (DeFi) platforms, where users seek loans, savings, and returns outside the framework of conventional financial institutions. This would further increase the demand for the cryptocurrencies that power these networks, resulting in a rise in their price. However, the rapid growth of the DeFi sector could trigger stricter regulatory measures. Countries could impose restrictions on access to certain services or increase regulatory requirements for DeFi platforms. So, while a dollar crisis could initially trigger a rally in the crypto market, in the long run, regulatory pressure could slow that momentum.
Source: cointelegraph
The role of stablecoins in times of dollar crisis
Stablecoins, which are often pegged to the U.S. dollar, are considered a safe haven in an otherwise volatile crypto market. But in the event of a dollar crisis, the foundations of these stablecoins could be shaken. If the dollar loses value, the stablecoins that are pegged to it would follow the same decline, leaving investors looking for safer alternatives. In such a scenario, stablecoins pegged to stronger fiat currencies such as the euro (EUROe) could gain popularity. Their association with stronger national currencies provides investors with a more stable base against the dollar.
Another option is stablecoins pegged to commodities such as gold, such as Tether Gold (XAUT) or Meld Gold, which base their value on physical gold reserves. In times of currency volatility, these types of stablecoins attract investors who want to protect their assets from inflation and currency devaluation. Additionally, algorithmic stablecoins like Frax (FRAX) or OlympusDAO (OHM) could also gain prominence. Unlike fiat-backed stablecoins, they use decentralized algorithms to control supply and preserve stability, although their sustainability and trust have been eroded following the collapse of the Terra ecosystem in 2022. years.
Source: cointelegraph
Could the dollar crisis cause the high adoption of cryptocurrencies?
History shows that the US dollar is an extremely resilient currency, often recovering after periods of weakness when fundamental problems are resolved. The current crisis has been triggered by short-term factors such as the war in Ukraine, disruptions in global markets, rising energy prices, and the Federal Reserve’s recent interest rate cuts. When these factors stabilize, it is expected that the value of the dollar could also strengthen again, which could lead some investors to return to traditional dollar-denominated assets, abandoning cryptocurrencies that they used as a temporary “hedge” against volatility.
However, there is also a strong argument that entering the world of cryptocurrencies could be an irreversible process for many users. The data shows that few users are returning to traditional financial tools after experiencing the benefits of decentralized finance (DeFi), global transactions without intermediaries, and financial autonomy. According to Gemini’s 2024 Global State of Crypto report, more than 70% of previous investors plan to reinvest in cryptocurrencies within a year. Also, Coinbase’s report for the first quarter of 2024 showed that most users keep their crypto investments even during market downturns.
This trend indicates that the dollar crisis could have lasting consequences on the adoption rate of cryptocurrencies. Even if the dollar recovers, the speed, cost-efficiency, and financial independence offered by cryptocurrencies could keep many users in the crypto space. Instead of using crypto only as a temporary hedge, a growing number of investors could adopt it as a permanent alternative to traditional financial systems. Along with the other trends mentioned in this blog, it is possible that the dollar crisis could spur mass adoption of cryptocurrencies and trigger new market growth.
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